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Rules for investing in property in a Sipp

HM Revenue & Customs rules for investing in property are relatively simple in that nothing is actually a banned investment.

Residential property

However any investment that is deemed as residential has serious tax consequences if accepted into a Sipp, with tax charges of a minimum level of 55 per cent and any investment gain attracting a further bill.

There are limited exemptions where residential may be a feature of a commercial property such as a pub with a managers flat above, where the occupant is an unconnected employee of the tenant company and is required to reside there by the terms of employment.

Ultimately, though, Robert Graves, head of pension technical services at Rowanmoor, says investing in residential buy-to-let property or essentially any form of residential property is not viable.

The only real way to invest in residential property with a Sipp, which isn’t a specific exemption, would be through a residential property fund, says Claire Trott, head of technical support of Talbot & Muir.

The funds have to hold a minimum number of properties and have a minimum value, so Ms Trott says it would really just be like investing in any other fund and no personal control would be available unless you are the one running the fund.

Basic rules

There are many rules around buying and holding commercial property in Sipps, Andy Leggett, head of Sipp business development at Barnett Waddingham, says.

In essence, Mr Leggett says these are designed to ensure that undue advantage is not taken of the tax benefits. For example, he says the property has to be bought for a fair market value, rents must be similarly set at market rates, arrears must be pursued.

Where the Sipp is either buying the property from a connected party or renting it to a connected party, for example the Sipp member’s business, Gareth James, technical resources manager at AJ Bell, says the transaction must be carried out on an arm’s length, commercial basis.

He says: “Some Sipp providers place a limit on the percentage of a Sipp that can be invested in property, although this is typically to ensure that sufficient cash is retained in the Sipp to cover expenses, not to ensure diversification.”

The Sipp needs to have some liquidity to cover property expenses, for example, insurance, which is usually reimbursed by tenant, and Sipp fees, Mr Leggett says. The member may also choose to maintain some liquidity to cover contingencies such as a tenant falling behind on rent or the property being vacant for a period.

Mr Leggett says: “Most Sipps that invest in property generate significant positive cash flow due to the rent and this will accumulate over time, perhaps being in turn being invested. This will have the effect of reducing the proportion of the Sipp invested in property over time.”